After clearing defence FDI, govt now adds an extra layer of scrutiny

SummaryIt would seem that little would change soon for India, which has come to be the largest importer of defence equipment and conventionally been a laggard in adopting state-of-the-art technology in the field.

It would seem that little would change soon for India, which has come to be the largest importer of defence equipment and conventionally been a laggard in adopting state-of-the-art technology in the field. The government, which recently decided to allow foreign direct investment (FDI) above 26% in defence production on a case-to-case basis in technology-intensive areas, is introducing another regulatory layer to vet such proposals. According to a senior government functionary, not just the defence ministry but the Foreign Investment Promotion Board, an agency that consists of top officials from various ministries, including finance and industry, will sit in judgement on whether a proposal for FDI higher than 26% in defence involves state-of-the-art technology.

The Cabinet Committee on Security headed by the Prime Minister, the final arbiter, will take inputs both from the defence ministry and the FIPB. And the defence ministry has agreed to it, the source said.

This, analysts said, could scupper the chances of much higher levels of FDI flowing in and technology changing hands.

American defence companies like Textron , Honeywell and Lockheed Martin among others have long waited for the Indian government to ease FDI norms in defence. India's defence expenditure has risen at a much higher rate than the global average, but indigenisation of high-tech production hasn't kept pace with that spending surge.

Blame the low the ceiling of 26%. FDI into India's defence sector has been very low — just Rs 24.36 crore ($4.94 million) has flown in between April 2000 and April 2013.

According to sources, proposals with more than 26% FDI in defence will go through the additional scrutiny of the FIPB and the board will now do the initial vetting of the proposals and define what high technology means.

The revised FDI policy for defence notified last week enables the department of defence production to examine proposals for FDI beyond 26% from the point of view particularly of accessing modern and state-of-the-art technology. It also says that foreign institutional investment through portfolio investment is not permitted.

“The defence ministry has agreed to initial vetting by the FIPB. This is required for a fair vetting of proposals. It will ensure transparency,” said an official of the department of industrial policy and promotion (DIPP), adding that the department was able to convince the defence ministry of the need to have FIPB scrutiny.